Sunday, February 26, 2017

President Trump would be wise to instruct his administration to give solid consideration to legalizing marijuana or ending Federal laws that attempt to control state rights over the issue. This would go a long way to quiet much of the social protest and angst that mainstream media has been able to stir up within liberal ranks. Polls clearly show most Americans agree marijuana users should not be sent to prison and see using it as a victimless crime. Due to current drug laws, there are far too many non-violent criminals filling up our prisons. This is an area that continues to polarize America while energizing and
motivating our youth and huge segments of our population to hit the streets in protest.

This is a matter that many Americans feel very strongly about and just like those supporting gun rights they tie it directly to the issue of freedom. Liberalizing and changing the laws surrounding marijuana has become a more bipartisan issue over the years as a growing
number of conservatives and Republicans have moved to supporting laws that reduce or eliminate prison sentences for drug use. Back in March of 2015, Republican Sen. Rand Paul of Kentucky, joined Democratic Sens. Cory Booker and Kirsten Gillibrand to
end the federal ban on medical marijuana, now legalized in 23 states. Many of the 2016 presidential hopefuls including Jeb Bush, Sen. Marco Rubio, Gov. Rick Perry and Sen. Ted Cruz, all said they believe
states have the right to make their own marijuana laws. The fact is this goes beyond using marijuana for medical use. While it is known that Trump does not drink because of personal reasons this does not mean those feelings and views transfer to this issue.

This Is A Hot Button Issue!

Over the years I have researched and written several articles about this subject and Americas war on drugs. As
a resident of Indiana who supported Trump, I was not happy to see him select Indiana
Governor Mike Pence as a running mate. Back in 2013, I wrote an article titled, "Indiana Marijuana Laws A step Back In Time" which condemned Pence for his backward and oppressive stand towards
marijuana. It noted that with the rest of the United States moving
towards relaxing marijuana
laws, Indiana was bravely marching into the past by increasing jail time for minor possession. Many Americans fail to realize that Pence had generated within Indiana a solid "Pence Must Go" movement committed to ousting him from office.

In the last decade, due almost solely to the surge
in drug-related arrests, U.S. prisons are massively overcrowded and
underfunded. In another article, "War On Drugs Is Far Too Costly" it is pointed out that numerous
reasons exist that Republicans should support marijuana reform. Republicans
support state’s rights, smaller government,
and want to stop wasteful spending. The war on drugs has been far
too costly and much of it is over marijuana. It is time we grow up and
end this costly polarizing and divisive war that damages so many young
lives and has taken a huge toll on minority communities. This issue is a big part of a legal system that highlights inequality
and injustice and serves as a magnet for those who feel oppressed.

Minorities Have Been Hit Hard By Current Laws

Last but not least we should not underestimate how the propaganda film, Reefer Madness has greatly and quietly influenced the views of a whole generation of Americans towards marijuana. The 1936-1939 American propaganda film revolving around
the melodramatic events that ensue when high school students are lured
by pushers to try marijuana. Now with prisons across America
bursting at the seams, we are finally beginning to question the wisdom
of these costly policies. Trump and those in Washington would be wise to
heed changing public opinion and look past the myths about this drug
that has resulted in many young people being sent to prison for until this is addressed and resolved the streets and prisons of America will be filled with the discontent.

A great deal of speculation and fear is that newly appointed Attorney General Jeff Sessions will enforce federal law and come down on states with a vengeance. Such a move could spark a rollback and retrenchment of recent efforts to bring marijuana use into the open. The well entrenched establishment in Washington marches to its own agenda and Trump with his efforts to dislodge them needs all the friends he can find so it makes little sense for him to go out of his ways to create more enemies. This issue takes our eyes off more important and pressing issues. Recent polls and a media campaign centered on bashing Trump tend to undermine his ability to create legislation and do not bode well for his ability to govern. Protest in the streets are also roadblocks for a positive agenda.

Saturday, February 25, 2017

Some investors have stated that war is good for the economy but it could be argued not always. While disputing the statement I also rail at the arrogance of such people who often have little regard for the lives that war destroys. I contend they are basing their opinion or observation on a rather
limited view of warfare. If in some future war things
escalate rapidly or someone makes a mistake and unleashes one or more
nukes killing millions and turning the ground into an unlivable wasteland the cost of war may be proven far too heavy to bare. The fact that war can and has often rewarded investors in the past is no guarantee it will perform as well in the future.

Bubbling up through the forces that bring us to
war is the stupid and shameful myth that it is good for the economy.
While war does line the pockets of a few industrialist and businessmen
the cost is great and outweigh the benefits. War brings about the wrong
kind of economic growth and such spending quickly creates a
wall of debt. While those who benefit from the
production of weapons busy themselves
with promoting war as a solution to our woes as an answer warfare often
fails to
be either easy, swift, or true. For proof, we need only look upon the
millions of people displaced and forced to flee war-torn areas, these
refugees often pay the price for the billions of dollars of military
hardware produced at a profit and pumped into countries across the world.

China Boost Its Economy By Building Machines For War

When a country
gorges at the trough of deficit spending to construct weapons it can easily manipulate a big
temporary boost in its GDP. One of the best examples of building an
economy on a foundation of military might or a massive move to
militarization was demonstrated by how Germany was turned into a war
machine during the 1930s. Hitler is often seen as the force
guiding Germany's economy, how much he contributed is a matter of
debate. Hitler's views on the economy were mixed and of secondary
importance to his more overriding goals.
Remember Hitler rose to power following the hardships of World War I and
Germany's historic bout of hyperinflation in the mid-1920s.

The crash
in 1929 and the Great Depression that spread across the world created an
environment where Hitler was able to become Chancellor of Germany in
1933. Under his leadership the Minister of Economics introduced the
Mefo bills (Government IOUs) that existed alongside the Reichmark,
industries were allowed to trade these bills among themselves. This was a
scheme that allowed Germany to rearm by creating a huge off the book
deficit and massive national debt. As a result, employment soared
and wages rose. The part of this story many people forget is the
prosperity was false and temporary. The fast growth only masked real
problems within the economy and resulted in rationing and shortages in
things like poultry, fruit, and even clothing for many of the people.

War Is Ugly And Has Hidden Cost

A major problem of a war based economy is the issue of sustainability. It is expensive to maintain an army and war is a destructive force. Long gone are the days of conqueringyour
enemy then raping and plundering your way to glory and riches. At least
so it seems and we can only pray that part of mankind's history is
fading into the rear-view mirror. In many ways, this lessens the appeal
and lowers the risk reward ratio of war. When after winning a war if you
have to pay and invest money in rebuilding the enemy you defeated, war
becomes rapidly unappealing. The only real winners are those
manufacturing the weapons and signing massive contracts to rebuild what
has been damaged. Another problem is if society takes the position the
lives of their soldiers have value, the cost of lives lost and the money
spent to care for the wounded and other programs for those who have
served quickly adds up.

The sad reality we face is that plans have been made that move us solidly in the direction of "automating war." The
development of drones and killer robots is well under way and will
massively change warfare and take mankind'' savagery to a new level. Seriously, are we to be impressed and inspired at the profits made from rebuilding cities and countries destroyed and devastated by war? This is akin to the broken window economic model where we celebrate and break windows thrilled because we are creating jobs employing those making glass as well as those that install it. Let us not forget America was broke and bankrupt at the end of World War II. If memory serves me correctly Vietnam and our outing in the Mideast have also come at great cost. This leaves me unenthusiastic whenever I hear warmongers and greedy investors urging war as a cure-all.

Monday, February 20, 2017

Elon Musk is one of those iconic figures the world occasionally conjures up to wow and entertain the masses. As media generated symbols of success go he ranks up there with the best of them. Much of the aura that surrounds Musk
comes from his success at PayPal. Musk co-founded X.com., an online
financial service and e-mail payment company, in March 1999. One year
later, in a 50/50 merger, X.com joined PayPal a company that operated an
auction payment system similar in size to X.com. Musk was instrumental
in organizing this deal due to his belief in emerging online transfer
technology.
The combined company at first adopted X.com as the corporate name, but
in February 2001 changed its legal name to PayPal Inc. Musk is credited
in driving the new PayPal to expand and focus on a global payment
system, in October 2002, PayPal was acquired by eBay for $1.5 billion in
stock, Musk, the company's largest shareholder, owned 11.7% of PayPal's
shares.

Elon Musk, Visionary And Wonder-Boy?

With his youthful looks and forward thinking the media latched on to Musk and propelled him into being viewed as a visionary and wonder-boy that turns everything he touches to gold. When talking about the CEO of Tesla Motors, Bloomberg News almost
always says "Billionaire Elon Musk", this happens so often that many
people probably think his first name is "Billionaire". As to the source of his success, it seems Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. This figure includes a variety of government
incentives, including grants, tax breaks, factory construction,
discounted loans and environmental credits that Tesla can sell. It also
includes tax credits and rebates to buyers of solar panels and electric
cars. The
figure underscores a common theme running through his emerging empire: a
public-private financing model underpinning long-shot start-ups. He definitely goes where there is government money,” said Dan Dolev,
an analyst at Jefferies Equity Research.

An example of how deep these subsidies feedback into the numbers is that Tesla collected more than $517 million from
competing automakers by selling environmental credits. In a regulatory
system pioneered by California and adopted by nine other states,
automakers must buy the credits if they fail to sell enough
zero-emissions cars to meet mandates.I have written several articles about Tesla and Musk over the years but as I continued my research for this update and a more in-depth piece my eyes literally began to glaze over at the magnitude of the subsidies. Government
support is a theme of all three of these companies, and without it, none
of them would exist. Then comes the issue of corporate incest, in August of 2016 Tesla formally
announced it would be acquiring ailing SolarCity in an all-stock $2.6
billion merger. At the time Musk owned 22% of SolarCity which was founded by his cousins. The merger was promoted on the idea that Tesla's mission since its inception was part of Elon Musk's overall "Secret Tesla Motors Master Plan" to expedite the world's transition to
sustainable energy and away from a fossil fuel economy. Musk called the merger a no-brainer and said it was an
accident of history that Tesla and SolarCity were
ever separate companies.

Only About 1 In 5,000 Cars Is A Tesla!

Tesla is in the
news far more than a company with such a small footprint would
merit. Much of its significance is derived from Musk who remains a master at getting press coverage, most of it "free"
and positive advertisement. Please take note of how insignificant these
numbers really are. Tesla Motors announced in early August 2009 that it had achieved overall
corporate profitability for the month of July 2009 when it earned approximately $1 million on revenue of $20 million.
Profitability arose primarily from improved gross margin on the 2010
Roadster, Tesla’s award-winning sports car known for its designs and "very sexy lines", similar lines have been
on the drawing boards for years but were impractical because of the
internal combustion motor and all the mechanical junk
required to support it. Tesla, which like all automakers records revenue
when products are
delivered, shipped a record 109 vehicles at the time and reported a
surge in
new Roadster purchases. Even to date, Tesla's numbers remain small Tesla is said to have delivered 50,580 vehicles in all of 2015.

The value of Tesla's stock dramatically changed years
ago following the report where it made
its first quarterly profit, its market value soared to more than $10
billion. It should be noted a large part of the increase in the stock
price occurred when
people that had short positions in the stock were caught in a short
squeeze and forced to buy back their stock. At the time Musk said, “I thought it would be
quite difficult to raise the capital for
Tesla.” he went on to state his realization the electric-car maker
could retire its U.S. loan nine years early didn’t arise until Tesla
shares unexpectedly surged. Since that time Tesla's fortunes have moved in lockstep with a surging stock market. In an upbeat article just published by Inside EVs, it was pointed out that Ford stock has fallen 23 percent from 2015-2017 and now sits at
$12.65 per share. Tesla stock is on the rise, approaching an all-time
high, at about $281 right now. This accounts for a market share of $43
billion for the electric startup, compared to Ford’s $49 billion.

Tesla currently has a market cap that is 88% of Ford its much large competitor. It is important to note thatin January 2016, Ford Motor sold 173,723 vehicles in January 2016 while Tesla made a little over 80,000 cars in all of last year and has sold only about
191,000 vehicles to date. Ford built over 6.5 million vehicles in just the last year alone. As for
Tesla's stock which continues trading at incredibly high multiples, much of that
can be contributed to the historically low-interest rates and the luck
of being in the "QE moment" rather than the company's financial success.
Bears and those that doubted if the company could hold together
ironically have pushed up the stock adding to the image that Musk
lives a charmed life. Remember the company had received a huge
government low-interest loan to kick start its existence, also note that
it has no legacy cost or issues that plagued so many of its
competitors. Now thanks to the gobs of money looking for any kind of
return, Tesla can borrow cheaply. Like several other high flyers lead by
self-promoters and propelled forward by media hype Tesla has been on a roll.

While it has not received the attention Tesla has garnered it should be noted that
most automakers have placed fuel cell electric vehicles with customers,
and many plan to introduce a Fuel Cell Electric Vehicle better known as
an FCEV
to the early commercial market over the next year or so. By 2020,
automakers expect to place tens of thousands of fuel cell electric
vehicles in the hands of California consumers. Among the automakers which are trying to bring this technology closer
to customers are Honda, Toyota and Hyundai Fuel cells could derail Tesla's vision of a world
where its battery-powered vehicles fill our roadways. Currently, lithium-ion battery technology powers Tesla’s electric vehicles.
It could be argued that Tesla could do a "switch-a-roo" and simply
change out its power source from battery power to fuel cells. Adoption of the
fuel cell as the most desirable way to power not only vehicles but other
power hungry devices would be a big setback for Tesla because the
company has invested a huge five billion dollars in a new battery
factory. If fuel cells rule the day this would
spell big problems for Tesla.

It does not take much research to see public subsidies for Musk’s companies stand out both for the
amount, relative to the size of the companies, and for their dependence
on them. No effort has been spared to spin Tesla and Elon Musk as a
finished success, of course, the "proof will be in the pudding" when we
look back years from now. Time will most likely determine whether Musk
is viewed as an unabashed promoter or a serious visionary. Using
government programs and loans as well as money from investors Musk has
built a pulpit from which to position himself for praise and at times ridicule.David Stockman wrote in May of 2015, In a world saturated with
excess automotive capacity and dominated by some of the most formidable
engineering, manufacturing and marketing organizations on the
planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but
that would be too generous. In an honest free market, Tesla would have
long ago been carted off to the chapter 11 junk shredder.

Tesla enters 2017 with the goal to launch a new car, open a large battery factory, and perfect autonomous driving. When all the hoopla ends,
the question is whether larger competitors will simply overwhelm and
crush Tesla, or will Tesla instead position itself to grow and maybe
take over a competitor to help propel it forward. Remember this is a
field where many have failed, one great example was the Delorean. I have
become predisposed to discount, and have actually grown a massive
aversion to "media hype", this is one reason you should color me
skeptical. The city where I live, like other cities across the world,
have a long list of bold men herald and declared to be "gods gift to
business," many in the end flew too close to the sun only to crash and
burn. In any case, what has happened at Tesla Motors and to Elon Musk's
other ventures up until this point might be enhancing the meaning of the phrase, "I would
rather be lucky than good!"

Saturday, February 18, 2017

For a long
time, I have had a problem with those pointing to the
auto industry as proof that the American economy is on
the mend.The auto market is facing oversupply and this means lower prices. This has been predicted by many of us for some time, however, it has been postponed by a wave of subprime auto loans that have allowed a buyer to purchase a car even when it makes no sense financially. Years of rising auto sales driven by artificially low
interest rates have driven sales and leases. While we hear claims that
the auto market is
hitting on all cylinders we also hear of far too many unemployed
students buying new cars. Failure to focus on where the sales are coming
from or originating is a mistake and a clear sign this industry is creating its own problems in future years. Recently, we have
heard about sales, not about soaring profits. Record levels of channel
stuffing will often produce sales gains,
but no profits.

The lower prices have taken longer to arrive than many of us have anticipated, however, the facts behind what has held up prices and pushed this market forward are very
disturbing. More of all new auto loans have been going to subprime
borrowers. Subprime
currently makes up about a third of overall car loans. The easiest
way to become a
subprime borrower is by defaulting on previous debt obligations. Auto
loan delinquencies have been surging, this means subprime loan
delinquencies now
stand at 18%. Pretending to sell automobiles to
people either dependent on money from the government or no means to pay
for that automobile is not a good
business idea. When you have huge financial lenders and the rest of
the Wall Street banking consortium doling out 7 year 0% loans and
subprime loans as if it were candy it’s easy to move inventory. Sadly,
while this has temporary
boosted
the GDP the issuing of what is destined to become more bad debt always
comes back to haunt us in the
long run.

Auto Debt Is Now over 1.1 Trillion And Rising

A big problem is that such lending often increases the monthly
obligations of people who are already struggling financially. Those defending this situation often see little reason for concern
and say there is no financial crisis in the making. For one thing, the
overall auto loan market is a comparatively small compared to the much
larger mortgage loans market of $8 trillion. Cars cost a
lot less than homes. Their logic is that historically, borrowers tend to make car
payments a higher priority than mortgage payments or credit card bills
because they need their cars to get
to work, school and for many other daily necessities.While this is often
true it avoids the reality that under the surface of these loans a
larger credit problem continues to grow.

The Federal Reserve has been pumping in trillions of dollars of liquidity into the economy and
much of it has resulted in pulling future consumption forward. These
policies will soon become a headwind to both future sales and growth. This is more proof of just what an infusion of
money from the Fed can produce and how it adds to the great distortion. The American people have been binge-buying cars and with the total stock
of outstanding car loans jumping to $1.1trillion, Harry Dent, a financial commentator was recently forced to ask: “Could cars be the death of us this time round?” Auto loan debt has continued to ratchet higher every month since
2010 when the Fed, Wall Street, and the political class in Washington
decided they needed new debt bubbles in auto loans and
student loans to jump start our moribund economy. Recent figures showed
that there are 65 million auto loans outstanding, and the average debt
now stands at $17,352. Currently, over 30% of auto “sales” are actually
leases. The
rest are financed over an average of 65 months. This means that
virtually all new car
sales are nothing more than 3 to 7-year rentals.

Issuing billions of debt to subprime borrowers for housing
proved to be a disaster and going forward we should expect the same
trend to reveal itself in autos forcing a slowdown in American factories and a dampening effect on growth. New-vehicle
sales in the U.S. were up 13% in 2012 and up another 7.6% in 2013, since then it has been up, up, and away.
The problem is that now more used cars are about to enter the market. Manheim Auto Auctions expects millions of off-lease cars to hit the market this year and says that
will continue to rise in coming years. This is good news for used-car
shoppers but does not bode well for the automakers. When used car
prices are strong consumers are more inclined to consider and buy a new
car that cost only a little more. Because many people have chosen
to lease cars in recent years we are now positioned that millions of
used cars will soon be thrust onto the market as leases expire. This
flood of used cars is expected to put massive pressure on the prices of
used cars as well as reduce the need for many people to buy a new
vehicle because of a secondary market that offered only limited choice
and selection.
Going forward all this will dampen new car sales in several ways. First car
shoppers can expect their trade-ins have less value meaning they will
face both larger loans and bigger payments or forgo the purchase. This
will carry over and make leasing more expensive because automakers base
lease rates on predicted resale or "residual values," which is an
estimate of what the new car will be worth at the end of its lease.
Another factor we should not underestimate is that many of the used
cars entering the market will be attractive top of the line models with
all the bells and whistles. These lower used-car prices are a delayed
response to
the new-car market's revival from the recession: From a bottom at 10.4
million in 2009. John Rosevear who has been
writing about the auto business and investing for over 20 years, and for
The Motley Fool since 2007 has suggested that if you want a nice car you might want to wait a little longer.

Millions Of Cars Coming Off Lease Now Flooding Market

The number of used cars coming off lease has already started rising, and if you
go shopping for a
good clean used car that is two or three years old with around 30,000
miles on it the odds are that you'll be looking at a lot of
cars that just came off-lease. The bottom-line is the automobile market is about to get "down in the
dirt competitive" as more than ample supplies and other factors hit both dealers and manufacturers. Adding to the idea auto prices
will not be rising anytime soon is a decline in
metal prices from overcapacity in China, factors such as lower commodity
prices are beginning to work their way into overall production
cost. It is also logical to expect companies exporting cars into the
united States to push hard to offset flagging sales in their own countries
and take advantage of their weak currencies which play out to their
advantage.
Much like the airline industry,
the auto sector has always had a history of being a "glamour" industry,
this means it tends to attract individuals who enjoy both risk and
attention. It also means it is full of stories marking past failures and
littered with names that no longer exist. A chief reason the automobile
industry took a beating during the 2008 downturn was because the world
was mired in overcapacity. When this occurs companies are forced to cut
prices and are faced with reduced profit margins. It is important to
note
that as competition sharpens it will most likely result in the demise
of many of the weakest players in coming years. Any slowdown auto
sales or the economy will only hasten this event and put
the stock prices of auto companies under a lot of pressure, do not be
surprised if the
issue of bailouts or downsizing again becomes necessary. Most at risk
are the smaller
players that will have difficulty raising capital in this industry that
constantly demands a company invest huge sums of money to stay
competitive.

Footnote; It is surprising how it often take a long time for problems to become apparent. Many people claim that those in control of the economy have a better handle on how things unfold but I think not. More on why many of us see a strong similarity between what is
happening today and prior financial meltdowns that have resulted in
crisis can be found below. http://brucewilds.blogspot.com/2016/12/thoughts-on-this-time-is-different.html

Tuesday, February 14, 2017

On occasion, it is important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don't understand exactly what derivatives are or why this market is so important. Trying to regulate this complex market
is easier said than done. These are usually lengthy complex legally
binding agreements that are very difficult to dissect and often reek
with possible contagion. Derivatives fall into many categories from
futures, options, credit default swaps, and any complex combinations of
these. They can also be used to wager, bet, and spectate on a market
move or direction. Regulation is difficult and spotty at best in that a
derivative transaction in one country
might be considered a simple spot trade in another. I have become convinced after studying derivatives that QE following the
2008 financial crisis may have been geared to hold up the
underlying value of assets that feed
into and
support the massive derivative market more than help the economy.

Derivatives Could Explode Like A Bomb!

WhileQE
was able to halt an implosion of derivatives and the resulting
contagion and shock that would have spread throughout the
financial system following the 2008 financial crisis next time we may not be so lucky.In the middle of 2014, the Bank for International Settlements revealed that the
amount of over-the-counter (OTC) derivatives outstanding reached 710 trillion dollars at the end of 2013, a 12 percent increase on the year before. Most
of that exposure is held by banks. The US Office of the Comptroller of
the Currency at the time reported the exposure of US banks to
derivatives totaled 237 trillion dollars. Of that, four big banks, JP Morgan
Chase, Citibank, Goldman Sachs and Bank of America account for over 219 trillion dollars. The staggering size of this market is beyond science fiction or anything that can be comprehended.

When I tried to get more recent numbers I ran into fairly stiff resistance which I contribute to the fact nobody really knows and the true exposure is difficult to assess, hopefully, much of the derivative exposure somehow nets out so that
real exposure is far less than the hundreds of trillions of dollars on the
books. Still, the situation is so
worrying to the Federal Reserve that after announcing the third round of
quantitative easing which included printing money to buy bonds (both US
Treasuries and the banks’ bad assets) it also announced that it
was doubling its QE 3 purchases. In other words, the entire economic
policy of the United States appears to have been dedicated to saving four banks that are too big to fail.
Yes, the main purpose of QE has been to keep the up prices to support the debt on which banks have loaned money.

Everyone paying attention knows that the size of the derivatives market
dwarfs the global economy. Paul Wilmott who holds a doctorate in
applied mathematics from Oxford University has written several books on
derivatives. Wilmott estimates the derivatives market at $1.2
quadrillion, to put that in perspective it is about 20 times the size of
the world economy. The world’s annual gross domestic product is around
55 trillion dollars. The Bank of International
Settlements regularly publishes
tables showing the amounts of different types of derivatives but these
categories are ambiguous making it hard to get a good
handle on what’s really out there.

The top markets regulator in the EU, the European Securities
and Markets
Authority have asked the European Commission to clarify what a
derivative is. There is no single commonly adopted definition of
derivative or derivative contract in the European Union. This plays
havoc with what and when reporting rules apply. It also highlights
divisions in how national regulators
view reporting rules for the $693 trillion over-the-counter derivatives
market. Remember this is only part of a much larger market that includes
hundreds of trillions of dollars in non-reported agreements and private
contracts.The efforts to achieve more reporting, more platform trading and
central clearing of derivatives have fallen behind because of the
"complexity of crafting mutually consistent regulations at the
jurisdiction level, for a market that is highly globalized in
operation".

While This Is Not A Current Chart Note The Trend Line!

Many of these writers of derivative might be called "too clever by half"
if they think they have successfully controlled the risk or removed the
implications and problems a default would cause. This is because they
make money in the process of structuring and selling these agreements. A
derivative is in many cases an insurance policy covered by collateral.
Sadly, those who buy and write derivatives often play fast and loose with
the value of the collateral or flat out lie about it. This moves them
from an insurance policy and into the area of high risk. Although central banks and bank regulators
are working hard to control banks' balance sheet leverage before the
next crisis hits, the continuing growth in derivatives trading by banks
is undermining those efforts. To view a good
video to learn more about what constitutes a derivative clink on the
link below; http://wn.com/derivatives_market

My point of unquantified risk was reinforced with the now forgotten closing of Mt. Gox, a major Bitcoin exchange in Japan. This
bankruptcy has not only focused attention on the risk of digital currency, but it also
rattled a still-newer market that regulators are just starting to
monitor that of Bitcoin derivatives. The
regulation of Bitcoin, let alone derivatives of it is unresolved in many parts of the world. Even as regulators and investors
struggle to grasp Bitcoin’s many uses and where it fits into the complex world of currencies they are now
confronted with the additional complexities of an emerging derivatives
market where entrepreneurs say current rules don’t apply. How do you properly value and assess the risk of such transactions? While the top US derivatives regulator, the Commodity Futures
Trading
Commission has lawyers considering if and how to oversee derivatives
linked to Bitcoin and other digital currencies this area remains untamed.

The Growth In Derivatives Is Troubling

The point of this article is to call attention to the insanity of
derivatives as an instrument or tool to add stability to our financial
system. By stacking risk upon risk and transferring it off to another
party who may not be able to perform or is over-leveraged you do not
increase stability. Derivatives do just that with the parties involved
often not even understanding the terms and implications of what they
have signed. To make things more complicated cross-border agreements
blur regulations, legal jurisdictions, and laws. A collapse or default
often results in years of legal wrangling and finger pointing rather
than a swift payout or settlement.

Possibly Why Deutsche Bank Stock Has Fallen

It seems that the leverage
problem these days is not excessive lending on housing, as it was in
2005-06, but exposure to derivatives. By far the largest type of
derivatives trading involves interest rate swaps, in which two parties
agree to exchange interest cash flows, usually with one of them paying a
fixed-rate and getting a floating rate in return. It's simply a
way of betting on interest rate movements instead of horses and always involves significant leverage. It's true
that banks are able to use interest rate swaps to hedge their exposure
to a certain movement interest rates, but for example JP Morgan's total
assets are 1.5 trillion dollars while its exposure to derivatives is a massive 70
trillion dollars or 47 times its assets, so you'd have to think there is rather
more gambling going on than hedging.

This is why I refer to derivatives as a house of cards. When one party
fails these agreements are often so highly leveraged the transfer of the
obligation or debt can put massive pressure and strain directly upon
another party. We must question the quality of many of these contracts
and worry about the potential of them to turn toxic. Contagion from
insuring a contract or acting as an agent in case of default can be
devastating with the obligation shifting to another party rather than
simply vanishing. My father often said, "squeeze all you want but you
can't get blood out of a turnip." This will be the case with those on
the hook for trillions of dollars when the silly but real derivatives
market heads south. Again this issue is about paper promises that
can vanish rather than tangible and hard assets. Derivative bets are not a zero sum game and have far reaching
consequences in the real world. Often debt crisis become apparent as or when a liquidity crisis appears in the financial system and have no doubt derivative have the potential to be the catalyst for such an event.

Sunday, February 12, 2017

If things were not already difficult for the Euro-zone they became even more so with the election of Donald Trump. President Trump has dramatically changed the balance of power in Britain’s trade negotiations with the EU. No matter how they try to camouflage and talk up the prospects for the monetary union of nineteencountries that share a common currency and the other nine members of the European Union which continue to use their own national currencies the road ahead remains challenging. For years this poorly constructed union has been criticized for being unable to resolve difficult issues but rather kicking the can down the road, postponing and delay have become the standard operating procedure for which they are known.

Greece's Debt Remains Unresolved And On The Books

Several stories at the end of January called to light that Greece’s embattled government is again deadlocked in difficult talks with creditors and this poses the risk the country’s debt crisis may again becoming an issue. This is because the European Stability Mechanism which is the Euro-zone’s financing arm announced that short-term relief measures would be frozen with immediate effect. One of the world’s leading rating agencies voiced concerns this will move Greece’s seven-year debt crisis into a troubling new phase. Faced with the dilemma of agreeing to additional austerity the fears of further uncertainty in Europe’s weakest member state are again mounting. To make matters even more dire the International Monetary Fund (IMF) now predicts that Greece’s debt load could become “explosive” by 2030. If a compromise is not found the scenario of Gr-exit may return.

An article that appeared recently on MarketWatch pointed out how the euro jumped to intraday highs after the head of President Trump's recently formed National Trade Council, Peter Navarro, told the Financial Times that Germany is using the currency's low valuation to exploit the U.S. and the European Union. Navarro also told the FT that Germany stands as one of the main hurdles to a trade deal between the U.S. and the EU. The advisor to Mr. Trump went on to say the euro was like an "implicit Deutsche Mark" whose low valuation gave Germany an advantage over its main partners. The comments suggest the new administration is focusing on currency as part of its hard-charging approach on trade, however, many other factors flow into the complex issue of trade and the value of currencies.

For example, in mid-December of 2013 EU officials announced a "crucial breakthrough" on a fiscal backstop for rescuing or winding up failing banks in the Euro-zone but the details were inconclusive from the meeting of the Euro-zone countries and they were still being haggled over by all 28 EU finance ministers in Brussels 18 hours later. In reality, Germany had prevailed in its reluctance to assent to any pooled liability for the Euro-zone banking sector under the new regime of Euro-zone supervision known as the banking union. The key issue as always was who pays to wind up or recapitalize a failing bank, and who decides when a bank should be closed down. The bottom-line is the breakthrough means a "common" or pooled Euro-zone backstop would not be in place until 2025 at the earliest and would consist of money raised by the banks themselves via a levy starting in 2015.

This has resulted in a lower valuation of the Euro in recent yearsthat reflects a growing number of economic hurdles facing the area rather than manipulation to benefit exports. Any rise in the value of the Euro will only exacerbate problems across Europe and strain the many social issues ripping away at the union. The fact remains the banks are in poor condition and the Euro-zone countries are not ready to backstop their losses. Even Greece remains a problem and is once again on the verge of collapse. Greek yields surged in the past week as the country didn’t secure a positive review at the Eurogroup on January 26th. Additional noise came after indications that the IMF still views the Greek debt as unsustainable and further measures from the Greek government are necessary as well as additional debt relief from European creditors.

The Unabated Flow Of Refugees Continues

Asset managers have acknowledged that political risks in Europe this year, including the French elections and German elections in September, could intensify pressure on Eurozone banks. It is impossible to rule out another global recession within the next two years which removes any incentive to invest in the Euro-zone banking sector anytime soon, as a matter of fact, such economic hardships would be a dagger straight into the heart of both the banks and the poorly crafted currency. As backlash grows the forthcoming French presidential elections in April could see Euro-sceptic candidate Marine Le Pen come to power, and with more problems facing the Italian banking system, it is clear to see many additional risks for Euro-zone banks loom in the near future. It is little wonder that many investors view continental European banks as being excessively risky.

Supporters of deeper financial integration have not, cannot, and will not break through a roadblock from Germany and some of the other better off countries to secure agreement on a common scheme to protect bank deposits. This means the poor countries remain poor and the economic divide continues to grow as money flows away from the weakest countries and banks and into the strongest.

Add to this the simple fact Turkey is rapidly becoming a horrible fit with other members of the Euro-zone that value human rights and the rule of law. Day by day the promises of a cohesive region of peace and prosperity are pushed farther and farther into the future. Several terror attacks have shattered the calm Europeans have come to expect. The situation has gotten so bad that many Americans will simply not risk a visit to the area even though the dollar has strengthened against the euro making such travel a bargain. Now we are hearing that the Euro-zone may turn towards China and Asia to buffer their prospects. All the above lead me to believe any hope that the region is about to suddenly turn the corner is more based on false hope and a wish than a reflection of events on the ground.

Tuesday, February 7, 2017

Many Americans do not understand why the American government continues to give and pour money
into Pakistan. The fact is most Americans know little about the Islamic Republic of Pakistan a sovereign country
in South Asia with a population of over 180 million people. What makes
Pakistan a very important player in its neighborhood is that it has nuclear
weapons and is politically unstable. Trouble has been brewing in our
relationship with Pakistan for years even though America has poured
billions of dollars in aid into the
country, it could be argued that we were buying their loyalty rather
than driven by the desire to be their friend.

Years ago when the
Pakistan government failed to control extremist elements in the country
America began to use drones to attack within the country's border, this
has stirred outrage and protest against America. It is only because of the money we have given Pakistan that we have been able to pursue such actions.
Many reasons exist to be concerned about Pakistan going forward, for
years the country has experienced internal violence and attacks from
extremist groups within the country. With the government sometimes
struggling to maintain order, and a military that sometimes threatens to
take control over the country the political stability of Pakistan is often
questioned. As the number of terrorist attacks have continued to rise over the years it sometimes appears the country is unfit for the many Pakistanis that want to live in peace.

The fact that Pakistan, and India it's neighbor to the south
both possess nuclear weapons and have a history of problems and
tensions is a huge worry and concern for the region. Pakistan's motive
for pursuing a nuclear weapons program was to counter
the threat posed by its principal rival, India, which has superior conventional forces. The relationship went bad between India and Pakistan from the very moment Pakistan
was created and has been affected by the seeds of discord in Kashmir. Despite being a new struggling state, the first Prime
Minister of Pakistan launched an immediate
war with India over Kashmir. That leader was assassinated and very
soon Pakistan settled down under
martial law. The military leader General Ayub Khan watched India lose
the war with China in 1962 and decided
to take advantage of the situation by launching another all-out war over Kashmir.

General Ayub Khan was replaced by Yahya Khan in 1969 and in just a span of two
years conditions were created for the Bangladesh War of 1971.
While
Pakistan lost decisively and lost a huge amount of land in the form of
Bangladesh little was done to resolve the bad feelings. Yahya lost office due to that debacle and gave way to Zulfikar Ali
Bhutto and a whiff of democracy. If India thought that democracy would
mean peace, they were sadly mistaken. Bhutto hated India and made the
famous declaration: “Pakistan will fight, fight for a thousand years. If.. India builds
the (Atom) bomb.... (Pakistan) will eat grass or (leaves), even go
hungry, but we (Pakistan) will get one of our own (Atom bomb).... We
(Pakistan) have no other Choice!...” The bottom-line as to why Pakistan is important, it is in a position to start World War III.

One encouraging sign that things may improve is that in recent elections
former Pakistani Prime Minister Nawaz Sharif has again been elected to
lead the country. This is a remarkable comeback for
the 67 year- old Sharif, who has twice served as the country's premier.
Toppled in a military coup in 1999, he spent years in exile
before returning to the country in 2007. Sharif has expressed a
desire to work with all parties
to solve the country's problems in a victory speech given to his
supporters. "I appeal to
all to come sit with me at the table so that this nation can get rid of
this curse of power cuts, inflation, and unemployment," Sharif said.
Despite a string of terrorist attacks, voter turnout was large, in the
hope of pushing for a solution to the
nation's woes in a historic election that marks the country's first
democratic transition of power in its 66-year history.There
is hope on both sides of the border that Sharif will
now take similarly bold steps to improve relations with India following his
election victory, this would reduce the chance of a fourth
major war between the nuclear-armed foes. The reason
for this optimism is not only his track record of reaching out to India
the last time he was prime minister but also his commitment to turning around
Pakistan's mediocre economy. Closer ties with India would allow much greater trade between the two
countries. Reducing the threat from India could
also help Sharif accomplish another unspoken goal,
reducing the clout of the Pakistani army, which has long used the
potential for armed conflict to justify a huge defense budget. The army sabotaged Sharif's previous peace efforts in 1999 by
secretly sending troops into India and eventually toppling him in a
coup.

Prime Minister Muhammad Nawaz Sharif recently urged India to stop the bloodbath in the Occupied Jammu and Kashmir and allow the holding of a free and fair plebiscite, a type of direct vote in which the entire electorate is invited to accept or refuse a proposal bringing to an end this long-standing dispute. Speaking on Kashmir Solidarity Day the Prime Minister upped the ante, saying Kashmir is the "core dispute" between India and Pakistan and the dream of peace
and prosperity of the people of the region will remain elusive without
resolving the issue." Kashmir's unfinished agenda of partition is one of the oldest disputes in the UN Security Council. Sharif said, "for the
last seven decades India has denied the people of Kashmir the right to
self-determination promised to them by the international community
through numerous UN Security Council resolutions".

Pakistan Continues To Rise On Terrorism Index

Still, the largest problem confronting the region is that while nuclear weapons can
add to national security they also add layer upon layer of complexity
to national defense,
even efforts to deploy a missile defense system can be viewed as an
offensive act. Indrani Bagchi, the Times of India's
diplomatic editor wrote that India will retaliate massively even if
Pakistan uses tactical nuclear weapons against it. India will protect
its
security interests by retaliating to a “smaller” tactical attack in
exactly the same manner as it would respond to a “big” strategic attack.
Yes, the reason Pakistan is important is that it has nuclear weapons
and could be sucked into, or be the one to start a nuclear war. Adding
to this concern is the fact Pakistan is ripe with jihadi organizations seeking a nuclear weapon or the fissile material needed to make one and both the military and the security services have been infiltrated by a number of jihad sympathizers.

The three key threats are a terrorist theft of a nuclear weapon, transfer of a nuclear weapon to another state like Iran and a takeover of nuclear weapons by a militant group during a period of instability. Pakistan is home to the harshest variants of Muslim Fundamentalism and headquarters of organizations that espouse extremist ideologies, these include Al Qaeda, the Haqqani network, and Lashkar-e-Tayiba. Nuclear bombs capable of destroying entire cities are transported in delivery vans on congested and dangerous roads. Sources say that since the American raid to kill Osama Bin Laden the Pakistanis have provoked anxiety inside the Pentagon by increasing the pace of these movements. Ironically the Pakistani government makes its nuclear weapons more vulnerable to theft by jihadis in an attempt to hide them from the United States that funds much of its military budget. Pakistan remains a powder keg but has been one for so long many people have discounted the risk.

Footnote; many of these points were written about in a similar article back
on August 8, 2013. Sadly little progress had been made to stabilize Pakistan and India has recently been undergoing internal issues.

Sunday, February 5, 2017

Make no doubt about the fact that trade policy has massive long-term
ramifications on the strength of a nation's economy. Why an event occurs or how it takes shape is generally the result of many factors coming together and not always a well planned and perfectly orchestrated plan coming together. Americans should expect the politically heated debate over trade
agreements to continue. Many articles supporting and praising the way trade has grown over the years sight how it has raised many people out of poverty and misery, they tout free trade as the answer to many economic woes. I contend many people fail to note the difference between free and fair trade.

This article is in response to a slew of comments from my recent article titled, "Higher Prices On Import Goods A Fair Cost For Jobs" because many of those supporting past trade agreements use low consumer prices as a battle flag around which to rally. Critics of existing policy say these trade
deals over the years have added to environmental problems across the world and
exacerbated economic inequality within many economies as
manufacturing jobs have been outsourced to low-wage countries. Internet
activists also weigh in with claims these deals can curb freedom of speech and other detractors
even charge it adds to the forces that enshrine currency manipulation. As we view the global economy we must ponder how much of
this is about individual governments giving up control and becoming
subservient to corporate
“efficiency” and the desire of companies to both develop and control
future rules.

In many ways, the global economy has become an ill-regulated business model tilted to favor
big business and giant conglomerates. The controversial TPP created as a new U.S. led Pacific
trade pact pointedly excluded China, however, that was not just about trade but a tool designed to cause China to lose influence and key export markets.While signatories championing the benefits TPP
claimed it would kick-start sluggish global growth, much of America's
political motivation revolved around the idea it provided a strategic
bulwark to China’s growing economic and military power. In truth, many people view the Trans-Pacific Partnership
(TPP) that was pushed by the Obama administration and a slew of corporate allies as a blatant attack on
labor, farmers, food safety, public health and even national
sovereignty.

Details of the agreement had broad implications that were
kept largely secret so most of us have little knowledge of its contents.
While being negotiated even members of Congress
didn't know much of its details because it is mostly
the product of corporate lawyers. Making the agreement even more
controversial was the belief held by many Americans
that bad trade deals with low-wage countries have contributed to our
current economic woes. When Massachusetts Senator Elizabeth Warren, came
out strongly against these agreements Obama said the Massachusetts
senator was “absolutely wrong” and accused
her of speculating about the contents of the emerging 12-nation trade
deal for personal gain. Obama's statement did little to
quell the
controversy, instead, it seemed to throw fuel on the fire.

Trade can be used as a stealth weapon resulting is massive shifts in wealth and that makes it a problem. Ironically, it
is a Republican controlled Senate that was most inclined to give the
Obama administration
the approval it wanted for TPP while job protecting Democrats backed by unions
railed at the deal. Senator Warren and those concerned that a trade agreement
with low wage nations will not be a great job creator for America have
history on their side. Economist Dean Baker said of the TPP, “This really is a deal that’s being
negotiated by corporations for
corporations, and any benefit it provides to the bulk of the population
of this country will be purely incidental.” It is worth noting that in 2008, as a
presidential candidate, Obama boasted, “I voted against CAFTA, never supported
NAFTA, and will not support NAFTA-style trade agreements in the
future.”

This Is Why Mexico Has Become An Issue

Historically,
trade laws are geared to enrich the “mother” country and was often used
to build a nation. Following World War II free trade arguably benefited
the economies of the countries
involved. This changed starting with 1994’s North American Free
Trade Agreement (NAFTA), which recognized that capital is now mobile, it moves
about the world and owes allegiance to shareholders rather than loyalty
to any one country. At
least it can be argued that NAFTA was intended to improve our own neighborhood and that as Mexico and Canada benefited, America would gain some degree of
"safer borders" and a mutual interest would be served. NAFTA
is the paradigm of what are most accurately called deregulation deals.
It promised better jobs in both the United States and Mexico.

Instead,
as well-paid workers in the United States were losing jobs to low-paid
workers in Mexico, badly paid Mexican workers were losing jobs to
those in China who would work for even less. This, in turn, places more
pressure on workers
in the United States. We should not lose sight of the fact that while free
trade is important, fair trade is far more so and should be the main
issue. Developing a long-term sustainable economic system that is
balanced would contribute to both global cohesion and the world economy.
Nationalistic exploitation of trade agreements has occurred
throughout history and it is naive to think such schemes will suddenly
end. The changes brought about by the development of the global economy
have been hard for many. Promises of widespread prosperity have fallen
short and we have seen the benefits flow to only a few.

This means a reason
for grave concern over our current course does exist and at some point, the damage from continuous massive trade deficits may become
irreversible. The trend of businesses and businessmen to cast away the
nation's best interest for a place at the table of the global elite has come at a great cost. Considering
this, it is little wonder trade has become such a heated issue. I see no
quick fix nor can I be optimistic about another system and legal framework for long
drawn out arbitration that dispenses solutions that neither thrill or
satisfy. The promises made that increased trade will
create new jobs has turned out to be largely a
myth and politicians playing the "fear card" with statements such as "We
can’t let countries like China write the rules of the global economy”
imply we are powerless to control our own fate and are about to be devoured, I reject this premise.

Wednesday, February 1, 2017

An article presented to me delved into the subject of high-earning
Americans, where their wealth came from, and just as importantly where
it was stored. This got me thinking about the so-called wealth effect as
well as how all that wealth was held. The really big earners in recent
years have benefited greatly from the surging stock prices as much of
their income has come from financial markets and gains in equities. Many
people seem to think this is the way things will continue and the hope of our future. When you have more
than you need or want to put money away for a rainy day where do you
store it? If you rated people on a "wealth chart" by how many tangible
assets they
owned you might be shocked to find much of the wealth people own is in
paper and this can be full of risk. In our world today the possibility of cyber-crime or cyber-theft takes this to even a higher level.

Safely Storing Wealth Easier Said Than Done

In many ways "paper wealth" is merely the promise of
future value. Unfortunately, this leaves much of society and many rich
individuals vulnerable to rapid financial loss if the tides of fortune
shift or if values rapidly change. Currently not only are we faced with
banks paying little in the way of
interest but we must also fear they or the government might reach in and
seize part of our money. By forcing people to pull their money out of
banks and other safe investments in search of higher yields we have
driven up stock prices. Some of these stocks have reached unbelievable
multiples.

People often do not understand money and wealth. Myths about both run
rampant and become intertwined with deeply rooted personal feelings
passed down from parents or acquired, these feeling often muddy and skew
how people deal with wealth. An example would be anyone who felt deep
down that money was the root of all evil would react to winning the
lottery far differently than someone with the belief that you can buy
happiness. I have even heard poor people say they didn't see much point
in winning a lottery of several hundred thousand dollars because
"that's not much money." When the B word "billions" is so prevalent in
society today it is understandable many people live with distorted
values.

Truth be told most people are not overly endowed with discipline this
includes many people that amass a fortune. This often means that many
wealthy people tend to "misplace" or lose track of where they have
placed their wealth. Sometimes it is simply put into a system that is on
autopilot. Years ago I purchased a property from a doctor on contract.
The doctor having also bought the property on contract had me just send the
payments to the man he bought it from so he would not be bothered. After
many years I contacted the doctor to discuss a discount for a cash
payoff and his accountant discovered the first seller had been paid off
years before but continued taking the money he had no right to. The doctor
was shocked and getting his money back proved difficult.

Annuities, pensions, stocks and such promises of future payment tend to
dominate the list of favorite vessels in which to store wealth and many
of these are leveraged to maximize returns and garner higher yields on
our investment. Cash is another option but holding it in your possession
leaves one open to theft and means the money will earn no interest.
What is often missing or overlooked is tangible fully paid for items
and things that are likely to hold their value and in the direct
possession of the owner. People tend to avoid tangible assets in their
control because they are often inconvenient. Valuables can be a pain to
have about and they often need to be insured which also calls attention
to their existence.

When you subcontract out control of your wealth or turn it over to a
money manager you often get promises but no iron clad guarantee.
Confidence in a money manager can quickly be dashed, all the people invested with Bernie Madoffdiscovered just how suddenly things can go south and promises turn hollow. While it has
become both fashionable and common in recent years to let someone else
who knows and specializes in financial planning and markets to control this
segment of our lives I feel it is a big mistake and a derelictionof
duty. Wealth should come with a warning notice saying "Holder Beware
This Commodity May Vanish Spoil Or Grow Obsolete At Any Time!"

About Me

Bruce Wilds is a contractor that owns real estate in the Midwest, his holdings include apartments and office complexes. He is anchored to reality and the economy as he maintains, designs, and leases buildings. This has made him keenly aware of rapidly changing lifestyles, this blog incorporates many of the experiences and knowledge from his hands-on business style, extensive travels, and studies of history, politics and economics.